House of the rising sum

The Government says it is working on plans to ease the price of building materials, which are among the dearest in the world. Phil Taylor spoke to a property company boss who says new home buyers in New Zealand are being ripped off.

Tony Sewell, Ngai Tahu Property chief executive, has led the iwi company through two decades. Photo / Martin Hunter

Tony Sewell is spending his Anzac weekend doing building work on his bach in Hanmer. As the boss of a property company with $460 million in assets, he doesn't need to dedicate his holiday to DIY. He does it, he says, "because I love doing it".

Sewell is chief executive of Ngai Tahu Property, the South Island's biggest property company, with assets of $460 million. "I stopped banging in nails for a living when I was 25," the 60-year-old told the Herald this week. But old habits die hard; he likes nothing better than swinging a hammer.

He has led the iwi company through two decades, been involved in negotiating Ngai Tahu's Treaty settlement and overseen the growth of its property business from an asset base of $2 million. He is now making waves by calling for a Government-led overhaul of a building industry he says doesn't serve us well.

Ngai Tahu is a property investor, developer and trader and is currently flat-stick creating subdivisions for the Christchurch rebuild. About the only property business it isn't involved in is house building, but Sewell hints that may be about to change.

The reasons are unfulfilled demand (there is an estimated 100,000 shortage of homes) and his belief that new house buyers are getting a raw deal.

If the price he pays for materials from his local building retailer for his DIY projects raised his eyebrows, he says he nearly fell over when his staff surveyed equivalent costs in California. His company looked at the United States, he says, because they thought the Government would legislate for affordable housing to be included in its subdivisions.

The first shock came when they explained to the Americans that building low-cost housing in New Zealand cost about $1500 per square metre. "They laughed at us," he recently told Radio New Zealand. The cost there was about $600. "That started us asking why."

They linked up with a company that builds 1000 houses a year. "The quality was better than was being built here. That was my second surprise." Sewell insists they were comparing apples with apples: the quality of materials compared, as did labour costs and California's earthquake codes. The Americans were a bit more efficient in their on-the-job processes but the big gap was the cost of materials.

A piece of treated 100mm by 50mm timber cost one Kiwi dollar there compared to $4 here, he says. Wallboard, such as GIB, was thicker and better and cost one-third. Concrete, plumbing piping and fittings all cost far less. "We didn't find a single product over there that had a comparable price in New Zealand. We have to ask ourselves why we pay a premium."

Sewell concludes it is because there is a lack of real competition. "We have a market dominated by some players," he says, "and we have a lack of awareness by the buying public." Plain 100mm sewer pipe - common in every house - was twice the price here of that in Australia. "Why? Shipping is not expensive. People talk to me about the economies of scale. The smart nations climb on the back of the big economies to benefit from their scale. So why shouldn't we buy out of a big American supplier using their economies of scale, and then we have only the shipping cost."

The local market won't fix it, he says, citing plasterboard. Knauf, the world's second-biggest maker, last year entered the residential housing market dominated by Fletcher Building's Gib board. Its arrival was welcomed by Economic Development Minister Stephen Joyce, who said it could save the Government 6 per cent on state sector contracts and potentially push down plasterboard prices for the public. Sewell said when he checked prices at Bunnings last weekend, the price difference between the two companies' products was an insignificant $1 per sheet.

"The market will not help us here. If we want to get housing at an affordable level, we need to start addressing this through legislation."

The Commerce Commission, tasked with guarding against anti-competitive practices, is currently investigating Fletcher's plasterboard supply arrangements with building supplies merchants. Its investigation into Auckland's commercial timber supply market resulted in the High Court last month fining Carter Holt Harvey $1.85 million for a price-fixing arrangement with Fletcher Distribution Ltd.

Fletcher Distribution blew the whistle on the arrangement to fix the price of framing timber at cost plus an 8 per cent margin and, in line with the commission's cartel leniency programme, was not charged.

The commission said the fine was an indication of the potential impact on consumers.

The Government is nearing the end of inquiries begun three years ago. The Productivity Commission reported in 2011 on the dynamics of New Zealand's worsening housing affordability.

The headline factors it identified were limited land supply (including policy constraints such as Auckland's Metropolitan Urban Limit) and a slow and a costly consent process, but it also reported on the high cost of building materials and house construction. At 50 per cent, materials are the biggest cost of building a home. A follow-up inquiry by the Ministry of Business Innovation and Employment, focusing on building materials, found they were about 30 per cent more expensive than in Australia.

Cheaper transport and efficiencies from higher volume were reasons given by New Zealand manufacturers but the Government is concerned limited competition, along with duties on imports, allows price gouging and that a lack of transparency over special pricing deals made it hard to know whether these get passed on to consumers.

Housing and Commerce ministers Nick Smith and Craig Foss, say the industry needs "a shake-up through increased competition and greater transparency". Smith worries that lack of transparency for consumers over what benefits builders get from loyalty schemes could mean tradespeople may not be seeking the best deal for customers.

Industry feedback on an options paper was due last December. At the time Smith indicated removing or reducing high duties on some imported building products, and reviewing anti-dumping duties were being looked at. The Government believes the price of plasterboard would reduce if duties were removed. The impact of nominal tariffs of 5 per cent on most items used in housing construction would have less impact because our free trade partners are already exempt or the levy they pay is being progressively reduced.

An unclear certification process, liability issues and a risk-averse industry since the leaky homes debacle were cited in submissions as impeding innovation and adoption of new products and services.

"Final decisions are still pending," Foss told the Herald this week. He would not indicate when any policy changes might be announced. "We know there is no magic bullet to solving the housing affordability challenge," he said, "and that's why bringing down the cost of building materials is just one part of the wide programme of work we already have under way."

Other measures included freeing up land supply, reining in development contributions charged by councils, cutting compliance costs, investing in construction sector skills and productivity, and supporting first home buyers through the Welcome Home Loan and KiwiSaver First Home Deposit Subsidy schemes.

Sewell encourages anyone building a house to get on the internet to check overseas prices and to question local charges. The problem was a "cost-plus system" where if the price of a building product went up the builder simply informed the customer the cost of his house had risen.

"No one is really looking hard. I think we need to get more interested in the procurement chain."

Builders could do better by their customers, he says. "I wonder why the [Certified] Builders Association doesn't have a buying co-operative, like the farmers do with RD1 Ltd. That would be a way to pass on savings to their customers, but they don't seem to have any interest in passing on savings."

The builders' association has 1650 member firms, together with 2500 individual builder members, making it the country's biggest building trade organisation. Chief executive Grant Florence said a buying co-op had been "looked at" and was "always on the agenda". Though there had been no discussion with RD1 Ltd about its experience, Florence said there were examples in the US that had worked. He didn't think finding seeding money would be a problem, either from co-op members or borrowing.

"It is a strategic decision for an association to do that. It is stepping out of the normal box," and there were "meaty logistical issues" in setting up.

Greater use of pre-fabrication, off-site construction and standardisation have been raised as a means of increasing productivity and lowering costs. G.J. Gardner, the country's largest home-building company, and Fletcher Building are looking at whether factory-produced homes would make business sense here. Fletcher's interest results from growing demand for lower-cost housing.

Impediments included a cultural preference for bespoke homes, a reluctance to build cheaper houses on expensive land, start-up costs and uncertainty whether volume would be sufficient. There were efficiencies to be gained in time, labour, consenting, eliminating weather delays and health and safety, but neither company thought it was "a slam dunk".

Factory-build interest group Prefab NZ says for the construction industry to advance it has to get away from the current method of "one client, one builder, one house, one year at a time". Prefabricated items such as roof trusses, wall frames and panel systems were already in the great majority of houses here. The next step was modular boxes, which could be assembled and clad to look like any other house. Ultimately, whole houses could be customised in the factory using digital technology, chief executive Pamela Bell recently said. Scale could be addressed by building companies sharing a factory.

The cost and availability of land has long been talked about but, says Sewell, "the big issue that everyone is running away from is that our homes in New Zealand are now heading towards $2000 per square metre. Would someone please give me a detailed, accurate and truthful answer as to why, because I think every citizen should be asking that question."

He hopes the result of the Government's inquiries will be "clear policy and legal positions. We have to act on it. No more commissions, no more inquiries. Can we get some work done?"

Construction costs50% of the cost of an average building.30% higher in real terms between 2002 and 2011.$72,000 increase in the cost of an average home in the same period.Source: Residential Construction Sector Market study - Ministry of Business, Innovation and Employment.